Welcome to part one on our four part series on profit-killing trading mistakes! Why is this topic important?
Simple:
Understanding the dangerous errors average traders make is critical to trading success. This is because all too often, the things traders do to “act like traders” destroy their chances of becoming successful.
The legendary trader Jesse Livermore supposedly said, “It never was my thinking that made the big money for me. It always was my sitting.” This is just as true for swing-traders and day-traders as it is for position traders! By the end of this report you will have a better understanding of why this is so.
Without further ado, here is the NAS Trading top 11 list of dangerous trading mistakes.
1.) Over-managing trades
This error involves “improving on” a trading plan by adding decisions that are based on gut hunches rather than sound trading logic. This includes:
- Bailing out of good trades prematurely rather than holding for a profit target
- Attempting to “trade out” of bad trades by adding to losing positions, rather than simply exiting and moving on. This is quite possibly the number one cause of trading “blow ups” for both individual traders and institutions.
- The trader who always seeks to “fine tune” their entry by a few ticks. All too often, this “penny wise, pound foolish” activity results in missing the best trades and cherry picking the losers.
- To the extent possible, pre-set all orders into the market well in advance of execution. This will eliminate 90% of these issues!
- Attach trade management (contingency) orders to your entry order. This simply means that once your first order is filled, either your broker or your strategy management software will automatically put in your stop-loss and profit taking orders immediately into the market. If you do this consistently you will be way ahead of the game.
- You do not need to watch the market quotes while your positions are on! In fact, tick-watching is often the least rewarding way to trade. The market loves to hypnotize traders and con them into doing the worst thing at the worst possible moment.
- Have a trading blueprint for each and every day that you trade, andenter your orders/manage your positions in the way that creates the least amount of stress and distractions.
- Strictly limit any day-trading or scalping to your pre-defined strategies during the active time of day. Once the most active period of the day is over, close your scalping or day-trading platform. Trading is NOT about working hard, it is about working smart.
· “What are the settings on your charts?” is a common question asked by newer traders. If you have asked similar questions, do not despair. I was certainly asking such questions when I first started trading.
- The truth is that chart settings are often arbitrary. They don’t have much to do with profitability. Profits come from understanding and acting on underlying market behavior.
- Most sound trading blueprints can be implemented with preset limit and stop orders. Even for day trading, the best signals are almost always visible on longer term charts and can be pre-set in advance. Take advantage of this.
- The most important factor to consider is what is driving the behavior of large, institutional traders. This is what the art of effective technical analysis is all about.
- This trader is consistently bleeding money to the markets, but does not want to stop because he feels that, “any day now” profits will materialize.
- This trader might feel they are, “paying their tuition” to the market so they can learn how to trade.
- The problem is that the market does not want you to graduate… ever! The market will take your tuition for as long as you are willing to pay it.
- Shake things up! The first step is to admit something is not working and to take a break from trading.
- Do not worry about “quitting.” In fact, periodically scaling back trading operations seems to be part of the cycle of successful trading. Learning how to rebuild after a down time is a key skill for ALL traders who survive and prosper.
- Trading without an edge is a recipe for failure, not success. If you are not finding any opportunities, that is fine. Just wait. Waiting and sitting are a big part of successful trading.
- You graduate and “stop paying tuition” to the markets only when you refuse to ever pay tuition again!
- This issue plagues both new and more experienced traders.
- Regardless, the problem is they are never able to organize a daily trading blueprint that allows them to execute their ideas consistently and effectively.
- Do not trade on any day where you do not have a defined blueprint. You can make your own, subscribe to a service that creates one such as NAS Trading, or use a synthesis approach.
- This is perhaps the number one account-killer for new traders!
- Here is a dirty secret that Forex brokers in particular do not want you to know: The revenue they make off of the average customer is almost identical to the average customer’s trading losses!
- The bottom line as a retail trader, you can’t compete with market-makers or “high frequency” traders attheir game. If you want to succeed at trading you must accept this fact.
- Attempting to do so is just as naive as attempting to compete head-to-head with Wal-Mart or General Electric!
- The key to success in any business is finding and executing on a niche strategy
- The small retail trader hassubstantialadvantages! Finding and then maximizing these opportunities is the key to success. Your trading blueprint should help you do this.
- (More advanced, new traders can skip) Analyze the ratio of your average daily dollar-volatility to your commission expense. If commission expenses are a substantial component of your account volatility, it will be nearly impossible for you to profit over the long run!
- Think about it: Do you believe your broker did a careful study to determine what tools would help their customers make the most money? Of course not.
- The secret purpose of your trading platform is to encourage you to trade as much as possible, so that you generate more revenue and profits for the brokerage firm.
- If you ever feel yourself becoming anxious to trade, becoming impulsive, etc., please consider that perhaps your trading platform was designed to make you feel this way.
- The NAS Trading mantra is: Simpler is usually better! Just like a doctor gives a patient the minimum dose of medicine to achieve the desired results, the trader should use only what is needed: The tools that contribute to actual results. Any more might be damaging to your financial health!
Exposure to (useless) information kills resolve and increases confusion. So far as NAS Trading is concerned, financial-entertainment of all kinds is tainted with hidden, misleading agendas and should be ignored.
The cure:
- Very simple: Stop scanning financial media, particularly during market hours. Not only is it a waste of time, it creates anxiety and contributes nothing to profitability. Weekends are often the best times to catch up on current events and look to what is coming ahead.
In trading you have to do two fundamental things: You have to create and manage a trading edge, and you have to manage your capital, or risk. Confusing these two things can lead to poor trading decisions. The easiest way to explain this is with an example:
- Suppose a trader trades both breakout strategies and pullback strategies. He enters on a breakout, it begins to work, so he moves a stop just above breakeven (A common tactic) in order to, “not turn a winner into a loser”
- Now, consider how this trader would react if he was not in the market: At this same price level (where he is now quitting on the trade); he would be entering on a pullback. In other words, the trader is using personal, historical information that is not the slightest bit relevant to market behavior. Or as Paul Tudor Jones Said in the book, “Market Wizards,”
I can always tell a rookie trader because he will ask me, “Are you short or long?” Where I am long or short should have no bearing on his market opinion. Next he will ask (assuming I have told him I am long), “Where are you long from?” Who cares where I am long from. That has no relevance to whether the market environment is bullish or bearish right now, or to the risk/reward balance of a long position at that moment.
- Traders who use ultra-close stops and move from losing trade to losing trade are making the same basic error. It is not a fun way to trade, and it can kill a good trading edge!
- What matters is this: 1.) Is the profit expectation in the trade still positive? 2.) Is the trade still within the risk management framework?
If both of these conditions continue to be true, there is effectively no difference between your current trade and the next trade you would make if you stopped out of the current one.